A Qualified Terminable Interest Property (QTIP) trust is an often-overlooked tax planning tool. Upon election, it can offer the proper income tax benefits and estate planning benefits for beneficiaries in the right situation.
In this guide, we will offer up some sample Clayton language to consider. But make sure that an experienced legal professional structures your QTIP.
The basics of the trust are pretty simple. Usually, it is used when a surviving spouse is to receive income from the assets in the trust for their lifetime, but the trust’s principal (or assets) will be left to someone else, usually children. It is typically used when a married couple has children from other marriages.
The trust serves two purposes. It controls the final beneficiaries, but at the same time, it takes advantage of the marital deduction and provides needed income to a surviving spouse.
A QTIP trust can work great if there are concerns relating to the following:
- A surviving spouse who might benefit someone other than your children who are the final beneficiaries.
- When there is concern that creditors could attach a surviving spouse’s assets.
- Concerns over a surviving spouse remarrying and then using assets to benefit a new spouse.
- When a surviving spouse is unsophisticated or simply vulnerable.
A QTIP trust will address the above concerns, but the trust requires some foresight or at least an executor who will engage a legal professional to make the timely QTIP election. They must consider all of the income tax and estate planning issues at the date of death.
When drafting a QTIP, make sure you consider language that addresses the following:
- Deciding how much discretion or control you want to give your spouse when making withdrawals.
- Spouses are often resentful when an outside trustee restricts withdrawals or demands documentation for withdrawals.
QTIP Trust Sample Clayton Language
The verbiage below is some sample drafting language that has been used to draft a QTIP. It is based on the Clayton QTIP.
But make sure you have your QTIP documents prepared by a legal professional with appropriate experience. Estate laws are constantly changing, and you want to ensure that you are compliant. Take a look:
Final Thoughts on the Election
The main goal of the QTIP trust is to allow your spouse to benefit from the income from trust assets during their lifetime. Upon your spouse’s death, the trust assets will be distributed to your children (or other beneficiaries).
If structured correctly, should your spouse remarry, their new spouse will not inherit any of your trust assets. Alternatively, if you have kids from a prior marriage, this will ensure those kids receive part of your estate assets.
So if you think a QTIP trust will work for you, think through all the provisions and sample language, so you don’t create a hardship for your spouse.